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Can Jay-Z's New Music Service Outplay Pandora?

Unlike Spotify, Jay-Z's new service dubbed Tidal has artist support. Is that good for prospective users?

Jay-Z's new streaming service, Tidal, will have artist buy-in, but can it grow subscribers? Source: Tidal

It seems rappers are becoming more known for their business exploits and less for, well, actually rapping. The genre has always had a certain degree of salesmanship due to lack of large-scale distribution deals in the early years: What started as selling tapes on the corner moved to clothes, vodkas, and appeared to culminate with Dr. Dre selling his co-owned company, Beats Electronics, to Apple for $3 billion.

There's a reason why many rappers are now focusing on alternative pursuits for wealth building over making more music -- it's increasingly hard to make substantive sums of money from their content as low-pay, streaming-based revenues continues to grow, essentially cannibalizing higher-pay CDs and digital downloads. So, many artists are forced to monetize their name -- aka brand -- to make up for the dwindling revenue stream from music.

Coincidentally, Jay-Z's newest project, Tidal, seeks to solve that problem. After buying the Swedish company for $56 million, Tidal looks to offer a streaming-based music service to compete with the likes of Spotify and Pandora(NYSE:P).

First-mover advantage versus threat of new entrantsFor Spotify and Pandora, the two most-popular streaming services, this is a case of whether their first-mover advantage will continue to withstand new entrants. Apparently, the barriers to entry for this format are rather low considering the annual revenue. While bigger entrants Apple, Google, and Amazon are to be understood considering their huge war chests, poorer-cash firms Beats (now owned by Apple) and Jay-Z's Tidal have also started streaming-music services as well.

Considering Jay-Z bought his service for $56 million -- a figure that probably included some type of takeover premium -- this is a rather small outlay to get into a large market. Per Statista, the streaming-based music market was a $1.87 billion market last year that grew 35% annualized over the past two years. For perspective, here's the chart courtesy of Statista:

Jay-Z's differentiating feature is supplier-friendly and could set Tidal apart -- or sink the companyFor streaming-based services, they have a real risk of supplier power. Considering Spotify and Pandora are only a deliverer, the risk of artists and music labels banning their material is real. For example, recently Taylor Swift pulled her content off of Spotify, stating low per-play payouts as the reason for the ban. Major label Universal wants Spotify to work more aggressively to convert ad-based listeners (read: free) to subscription-based users -- that way, Spotify will be able to pay record labels -- and artists -- more for content.

Tidal avoids this issue by not offering an ad-supported version. The company bills itself as a high-fidelity streaming service and appears to position its service as high-end with a price tag to match. Per the company’s website, the service costs as much as $19.99 per month after a trial period. The Wall Street Journal is reporting the service is also offering a lower-fidelity service for $9.99 per month. As a comparison, Pandora One is only $4.99 per month and Spotify Premium comes in at $9.99 per month. In addition, rumors are brewing about Apple reintroducing its Beats streaming product at $10 per month.

For suppliers, the inclusion of a premium option is a big win and you can expect huge buy-in. If you’re following social media you may have noticed, big artists like Coldplay, Kanye West, and Nicki Minaj have changed their Twitter profile pics to reflect Tidal’s color and are tweeting under the hashtag #TIDALforALL, while Taylor Swift has agreed to put her catalog on the service. While the record execs aren’t painting their offices in Tidal’s light blue, you can bet they are hoping for success from the service as their revenue streams should increase. The question for Jay-Z’s new company is: Will a large contingent of streaming-based users pay up to $240 per year for content they can get for free?

Jamal Carnette owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), Google (C shares), Pandora Media, and Twitter. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), Pandora Media, and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Inspired by the idea of "making your money work for you" at a young age, mostly because he was a lazy child, Jamal parlayed that inspiration into a love of the psychology of markets, competitive advantages, and thematic investing. He later shrug off that laziness, with a career that included stints as a mortgage trainer, a financial advisor, a Sr. Investments Communications Specialist, and a stockbroker. Jamal graduated from George Mason University with a bachelors of science in finance, American University with a masters in finance, and is a CFA charterholder.